3. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
Objectives
Identify general characteristics, advantages,
and disadvantages of each of these
organizational types for small businesses:
• Sole Proprietorship
• Partnerships
• Limited Liability Company (LLC)
• C-corporation
• S-corporation
4. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
What Do You Know?
What do you know or want to learn
about organizational types for
small businesses?
5. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
What are the 5 common organizational types
(also called “legal structures”)?
• Sole Proprietorship
• Partnership (general, limited, & LLP)
• Limited Liability Company (LLC)
• C-corporation
• S-corporation
Organizational Types
Continued …
6. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
Factors for Choosing an Organizational Type
• Taxation – Taxes on profits are paid through
personal tax returns except for corporations
• Liability and Risk – Responsibility for harm to
another person or property, or contract disputes
• Management – Decision-making authority
• Continuity and Transferability – How a business
persists and how it is sold
• Expense and Formality – Costs, legal
responsibility, degree of complexity
7. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
Discussion Point #1: Organizational Factors
Which organizational factors have the most
impact on your business?
8. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
Sole Proprietorship
Business is one and the same as the owner
Advantages and Disadvantages
• Owner has unlimited personal liability
• Pass-through taxes – personal tax return
• Owner controls business
• Simplest form of organization
• Lowest cost to form
• Appropriate for small start-up
9. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
General Partnership
Business association of two or more people
Advantages and Disadvantages
• Owners have personal liability
• Pass-through taxation
• Shared risk and costs
• Simple to form, low cost
Create a
partnership agreement
10. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
Limited Partnerships and Limited Liability Partnerships
Advantages and Disadvantages
• General and limited partners –
general partner runs business
• Pass-through taxation
• Requires a partnership
agreement
• Liability will depend on the
type of partner (general or limited)
11. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
Limited Liability Company (LLC)
Unincorporated hybrid entity, with traits of
corporation & gen. partnership (or sole prop.)
Advantages and Disadvantages
• Greater flexibility than sole proprietorship and
partnership in distributing profits (less restrictive
than S-corporation)
• Limited liability – like corporation
• Pass-through taxation – like sole
proprietorship or partnership
12. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
Corporation
Legal entity, created under the laws of a state,
which has its own privileges and liabilities distinct
from those of
its members
Types:
• C-corporation
• S-corporation
Most businesses
DO NOT need to incorporate
13. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
C-Corporation
C
Also called “regular corporation” (most common
for larger companies)
Advantages and Disadvantages
• Limited liability
• Company is taxed (double taxation an issue)
• Complex to form
• Complex ownership and management
• Appropriate for a few specific reasons –
otherwise, choose another organizational type
14. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
S-Corporation
Owner has limited liability of a corporate
shareholder but pays income tax like a sole
proprietor or partner
Advantages and Disadvantages
• Same as C-corporation except
for pass-through taxation
S
15. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
Choosing an Organizational Type
How do I decide which structure is best
for my business?
• Establish business plan, think about business
• Initial guidelines: Owner-operator?
Partnership? Multiple owners? Product with
significant liability? Large venture with multiple
owners and complex financing?
• Ask attorney
• Research through Small Business
Administration and IRS websites
16. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
Discussion Point #2: Your Organizational Type
Which organizational type will be right for you
and your new business?
17. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
Five Key Points to Remember
• The organization type impacts how you own and run your
business
• Match your legal structure to business needs i.e., Tax,
Liability, Management, Continuity and Expense
• Most common small business type: Sole Proprietorship is
same as the owner
• A Partnership includes pass through taxation and
personal liability
• A business plan is the best way to determine the
organizational structure right for your business
18. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
Summary
• What final questions do you have?
• What have you learned?
• How would you evaluate the training?
19. ORGANIZATIONAL TYPES and CONSIDERATIONS ‹#›
Conclusion
You learned about:
• Five organizational types (legal structures)
• Their characteristics, advantages, and
disadvantages
• Choosing an organizational type
Editor's Notes
Welcome to the Organizational Types and Considerations for a Small Business training. By taking this training, you are taking an important step to building a better business.
Identify general characteristics, advantages, and disadvantages of each of these organizational types for small businesses:
Sole proprietor
Partnerships (both general and limited)
Limited liability company (LLC)
C-corporation
S-corporation
The organizational type you choose for your business, sometimes called a “legal structure,” can impact your taxes and salary. Some common organizational types are:
Sole proprietorship
Partnership (general partnership, limited partnership and limited liability partnership)
Limited liability company (LLC)
C-corporation
S-corporation
As a business owner, you should match a legal structure to your business considering these five factors:
Taxation
Liability and risk
Management
Continuity and transferability
Expense and formality
Which organizational factors have the most impact on your business?
A sole proprietorship is a type of business entity that is owned and run by one individual and in which there is no legal distinction between the owner and the business. In other words, the business is one and the same as the owner.
Taxation: A sole proprietorship has pass-through taxation. The business itself does not file a tax return; rather, the income (or loss) passes through and is reported on the owner's personal tax return. Sole proprietors often need to make quarterly estimated tax payments.
Liability and Risk: The owner of a sole proprietorship has unlimited personal liability for any liabilities incurred by the business. You can manage much of this risk with insurance and sound contracts.
Management: Control of a sole proprietorship belongs entirely to the owner, who also assumes the full risk of the business.
Continuity and Transferability: A sole proprietorship lasts as long as the owner is alive and operating the business or until the business is sold. The owner can also sell business assets as well as transfer the business to a family member, usually through the estate planning process.
Expense and Formality: The sole proprietorship is the simplest way of doing business. The costs to create a sole proprietorship are very low and very little formality is required. A sole proprietorship may be an appropriate form of business for many small and start-up business ventures.
A general partnership is an association between two or more people in business seeking a profit. Like a sole proprietorship, partnerships have pass-through taxation and owners are personally liable for the debts of the business. General partnerships can be created with little formality, but because more than one person is involved, a written contract stipulating the terms of the partnership, called a “partnership agreement,” should be created.
Limited partnerships (LPs) and limited liability partnerships (LLPs) are two other organizational options for two or more people who plan to maintain a business for profit. Some jurisdictions only allow those who are licensed to practice in certain professions, such as law or accounting, to be eligible for the LLP structure.
An LLC is similar to a corporation in some ways while similar to a general partnership or a sole proprietorship in other ways. An LLC is considered a type of unincorporated association, not a corporation, even though it is a business entity. Similar to a corporation, though, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, including the benefit of pass-through taxation and greater management flexibility in allocating profits.
A corporation is a legal entity that is separate and independent from the people who own or run the corporation. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts incurred by the business. As a corporation, it has privileges such as the ability to enter into contracts but it also has certain responsibilities such as the payment of taxes.
The C-corporation, also known as a “regular corporation,” is the most common form of business entity for larger companies. Remember, unlike sole proprietorships and partnerships, corporations are separate and distinct from their owners in the eyes of the law. As a separate entity, corporations have several distinguishing characteristics including limited liability, easy transferability of shares (this is, ownership), and perpetual existence. Corporations also have a centralized management which may be different persons from the owners.
An S-corporation is a regular corporation that has elected "S-corporation" tax status. Forming an S-corporation lets you enjoy the limited liability of a corporate shareholder but you pay income taxes as if you were a sole proprietor or a partner.
Writing a business plan is the best first step in determining your business’s organizational structure. Your business plan will describe factors including:
Market
Sales volume
Management structure
Location
Marketing strategies
Financing
In addition, here are some of questions to answer before deciding on a structure:
Who will own the business?
Who else is involved with the business? Is this a partnership?
Who will manage the business?
Does your product or service carry significant liability risk?
How much financing does your business require?
Will you have outside investors?
What is the sales growth potential?
Which organizational type will be right for you and your new business?